Kenya has a good opportunity to reform its social security system

Kenya became the second country in Africa after Ghana to set up a National Social Security Scheme in 1965. [File, Standard]

The decision by the new administration to open dialogue with stakeholders to pave way for the implementation of the National Social Security Fund Act No. 45 of 2013 has ignited national debate with varied opinions. The irony of these conversations is that none is addressing the thrust and impact of the expected reforms.

To best understand why we have ended up here, let's dive back into where we have come from. Barely 18 months into independence, the government in 1965 published a policy paper titled 'African socialism and its application to planning in Kenya', famously referred to as Sessional Paper No. 10. The paper introduced a National Health Insurance Scheme and a National Provident Fund. There was an implied inter-linkage between the two schemes which would never come to be in operationalisation. But let's dwell on the latter.

Kenya became the second country in Africa after Ghana to set up a National Social Security Scheme in 1965. Forty six years later and after the country adopted a new Constitution 2010, the government published the National Social Security Policy in June 2011. The new policy informed the amendments to the NSSF Act 1965, hence the NSSF Act No. 45 of 2013 which became operational from 2014. However, several disputes with key stakeholders delayed its implementation until now and one would be forgiven for assuming the new Administration has introduced a new scheme.

The current conversation has taken a wrong trajectory by focusing on the 6 per cent contribution rate rather than the outcome and the architecture of social security. The first question policymakers should have asked is if the proposed changes in the NSSF Act 2013 address the challenges identified in the first 46 years of NSSF's existence up to 2011. For instance, are contribution rates the main challenge? I beg to differ with anyone who answers to the affirmative. Why was the contribution rate not increased in line with changing circumstances over time?

The other question is, in light of the vacuum created by the national social security scheme, what filled the gap? The answer is best explained by the development in the private pensions sector, co-operative sector and capital markets where Kenya ranks highly amongst peers in the region. It is therefore wrong to assume that Kenyans are not saving because the contributions to NSSF are little. Uganda, for instance, which has often been quoted as a success story with 15 per cent aggregate contributions to its NSSF, has just 43 per cent of Kenya's Sh1.55 trillion of pension assets under management. Interestingly, even with the "high" contribution rates, the NSSF in Uganda faces the same institutional challenges like the Kenyan one.

To resolve our social security problem, we must first do a proper environmental analysis before making any policy shifts. Three main issues stand out as current challenges; coverage, funding and adequacy. Higher contribution rates only addresses adequacy and assumes the target population is not already making adequate contributions through alternative retirement schemes.

Eighty five per cent of our population is in the informal sector. The NSSF Act 2013 retains a provident fund section for these category but the contributions remain voluntary. This technically means that compulsory membership covers only 15 per cent of labour force, many of them public service workers who continue to be covered in unfunded pension scheme. Although Section 70 of the NSSF Act 2013 binds the government as an employer for purposes of making contributions, the government and its institutions are probably the biggest culprits in either pending bills or outright default. The situation is worsened by past public servants' pension liability which remains a time bomb, probably more intense than foreign debt and should take precedence in any reforms in the pension's sector.

For the informal sector, retirement savings will remain elusive until a broad policy is rolled out to bring the sector in the retirement savings bracket. Some of the options include the government matching retirement savings for indigent citizens.

On funding retirement benefits, there is no doubt that majority of private formal sector employees currently participate in more robust occupational retirement benefit schemes. The aggregate contribution rates in most schemes is already above the prescribed 12 per cent, members of such schemes do not need the proposed changes in the NSSF Act as they long moved ahead. Any attempt to impose increases will only disrupt the witnessed growth.

To achieve the objectives of Sessional Paper No. 10 and informed by our past failures, the NSSF should regain its place as a first pillar national social security scheme. This means ceasing to operate as a provident fund into compulsory membership for every adult Kenyan with modest contributions. It must never compete with occupational and individual retirement benefit schemes as they play different roles. This can easily be achieved by formulating a proper framework. Unfortunately, both the National Social Security Policy of Kenya 2011 and the Revised National Retirement Benefits Policy 2022 fails to recommend this desired policy shift.

On funding, we must adopt a hybrid system for informal sector workers and the unemployed. There is need for flexible contribution arrangement within NSSF with selective government matching of contributions. Portability and options must be integrated in the policy, particularly for formal sector workers, where a good proportion of statutory retirement savings may be channelled into approved retirement schemes.

For instance, if the minimum statutory contribution rate is 12 per cent, mandatory contribution to NSFF could be set at 5 per cent with the remaining 7 per cent having an option to be invested in approved retirement schemes of one's choice. The rationale here is that the approved occupational schemes are already tried and tested, which is important for confidence and hence compliance for the savers. All other social security grants including cash transfer to elderly persons should be channelled through NSSF.